Former ECB board member says EU rules could pose bank run risks

The European Central Bank (ECB) presents the new 50 euro note at the bank's headquarters in Frankfurt, Germany, July 5, 2016. REUTERS/Ralph Orlowski

TALLINN (Reuters) - European Union rules on winding down failing banks could increase the risk of bank runs, a former board member of the European Central Bank said, reigniting a debate triggered by the collapse of Spain’s Banco Popular.

EU regulators shut Banco Popular, Spain’s sixth largest lender and saddled with a pile of bad loans, in June after it was fatally weakened by a sudden withdrawal of deposits.

Its activities and insured depositors were acquired by rival Santander for the nominal price of 1 euro.

That has prompted a debate on whether EU rules on bank resolutions - a mild liquidation - could have worsened Popular’s situation by contributed to the panic among its depositors.

Popular’s case was the first time that the rules, in force for less than two years, had been applied. They envisage losses for savers with uninsured deposits - meaning those over 100,000 euros - before a failing bank can be rescued.

“We should reflect on whether the resolution framework can accelerate bank runs,” Jose Manuel Gonzalez-Paramo, an ECB board member between 2004 and 2012, said in a contribution to Eurofi magazine, a financial publication.

Gonzalez-Paramo, who is now on the board of Banco Bilbao Vizcaya Argentaria (BBVA), also urged an alignment of rules to prevent different EU members treating failing banks differently.